Condominium Building Should Limit Rentals

Q: Our condominium currently permits any owner to rent out his or her condo. We would like to add a rule to our bylaws that caps rentals at 25 percent of the total number of units.

Can we do this and how would we enforce it?

A: When condominium declarations are written, a rule can often be included that limits the length of time a unit can be rented, the minimum term of any rental and even the number of units that can be rented at any one time. Typically, and for financing purposes, no more than 30 percent of units should be rented, and 70 percent should be owner occupied.

The 70/30 rule isn’t arbitrary. Conventional financing (mortgages that are sold to Fannie Mae and Freddie Mac on the secondary loan market) requires that no more than 30 percent of the units in a condominium building be rented at any one time to conform to the secondary loan market requirements.

Why this number? Owners who live in a building tend to take better care of their units and the building than non-owner occupants. It’s in Fannie and Freddie’s best interests to have the condominium stay in top shape and if 50 percent of the units are rented, the building may not have the same level of maintenance.

If your condo declaration does not include any restrictions on the number of units that can be rented at any one time, you’ll have to introduce an amendment to declaration or the rules and regulations of the building. In some cases, all of the owners will have to vote on this issue, and depending on the state in which you live, something over a majority (in some states, 70 percent of the unit owners have to vote in favor of an amendment to the condo declaration ) will have to vote in your proposal.

If you haven’t looked at your condominium declaration and rules and regulations in a while, you may need professional assistance to determine how to amend either your declaration or your rules and regulations. A real estate attorney who works extensively with condominium associations can help you out. If the condominium declaration states that there are no restrictions on leasing units, you may not be able to amend the rules and regulations to limit the number of leased units.

If the declaration allows for some restrictions to be imposed by the board of directors of the association and to pass rules and regulations relating to the leasing of units, you may have a better chance at having the rules and regulations changed without changing the declaration.

Once you change the condominium declaration or the rules and regulations, you’ll have to let everyone know about the new rule and then whether to grandfather in existing rental units or make people move when the lease ends.

I vote for grandfathering in existing rentals. These units will turn over in time and in the meantime, no new rentals will be allowed. This is a reasonable way to go and gives owners some time to adapt to the change. It will also prevent all of the rental units being put on the market at the same time, possibly deflating, artificially, the value of units in your building.

But, of course, I don’t live in your building.

Be sure you talk to your building’s attorney who can go over the declaration and rules and regulations with you and your association. The attorney can advise you on how state and local regulations might impact this move and what you need to do. You also will need to gauge the reaction by the owners. Sometimes a change of this type can open up a can of worms and cause a tremendous amount of angst and disharmony in a building.

Published: Jan 31, 2007


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